Business should welcome the Gillard government’s scrapping of its proposed $15-a-tonne carbon emissions floor price, to apply when its carbon tax morphs into an emissions trading scheme in 2015. Yet this should be just the first step in winding back the world’s highest carbon price before it does too much damage to the Australian economy.

For the belated decision also highlights how the post-2010 election deal between Labor and the Greens will continue to saddle Australian business with one of the world’s highest carbon prices until 2015. By then, the $23-a-tonne carbon tax is scheduled to escalate to $29 a tonne, the federal Treasury prediction for the international carbon price in three years’ time.

As The Australian Financial Review has pointed out, the price of carbon has collapsed to less than $10 a tonne for the possible sources of international emissions permits, the European trading scheme. And Climate Change Minister Greg Combet appeared to have trouble making the floor price work in conjunction with international permit buying. So, less than two months into its carbon tax, Labor has changed one of the basic rules underlying one of the biggest regulated price changes imposed on the Australian economy.

While that adds to the business confusion, it leaves Labor’s budget figuring in tatters. Trying to buy back popularity for her weak government, Julia Gillard overcompensated low- and middle-income voters for the cost-of-living impact of her high carbon price. Now the budget faces a permit revenue shortfall when the carbon tax shifts to a floorless trading price.

Mr Combet rejects this, maintaining confidence in Treasury projections that the European price will recover to $29 a tonne by 2015 (and to $40 a tonne by 2020). Yet, it is reckless to be betting the federal budget surplus on strong action by the Europeans to drive up their carbon price amid high unemployment and mounting budget austerity. This will undermine the credibility of Australian budget policy unless Labor faces up to the implications of the lower international carbon price.

The Financial Review supports Australia playing its part in global action to guard against atmospheric warming. And we support market-based mechanisms, such as a price on carbon, as the least costly way to reduce carbon emissions. But Australia’s carbon price should have started out low, rather than high. Labor should recognise this by at least capping its carbon tax at the $23 price rather than ratcheting it even higher over the next three years before letting it fall back towards the world price.